As business recovers, does your company plan to rehire back to the staffing level it was at before the recession?

PublishedApril 13, 2010 | ByAchim Neumann, President

Throughout the recession, many entrepreneurs trimmed their payrolls, among other big expenses. There have been tentative moves by some larger companies to rescind salary cuts for remaining employees, but few are rehiring the workers they cut. Private-sector firms in the U.S. eliminated 22,000 jobs in January, the 24th decline in a row, according to payroll company Automatic Data Processing Inc. Employment at smaller businesses—those with fewer than 50 workers—dropped by 12,000, ADP data show.

While employers of all sizes trim their work forces when the economy suffers, small firms tend to adopt the strategy sooner and more aggressively, experts say. “Cash flow is the oxygen,” says Nancy F. Koehn, an entrepreneurial historian at Harvard Business School. “You have to have enough to keep business going.”

Some entrepreneurs now say they’ve learned to operate leaner and won’t need the same headcount they had before, even after demand for services and goods fully rebounds.

Contributing to the problem are anxieties about the future of the financial markets, consumer spending and pending government legislation. For example, health-reform proposals being debated on Capitol Hill could dramatically alter the costs associated with employing workers, says Joel Shulman, an associate professor of entrepreneurship at Babson College in Wellesley, Mass. “If you’re taking on a new employee and you’ve got to pay higher health costs, that’s something to consider,” he says.

Some entrepreneurs say they’re making do with smaller teams by cross-training employees to handle new responsibilities. Others say they’re hiring contract or temporary workers on an as-needed basis. And some are dividing the tasks that laid-off workers used to perform among those remaining in the same departments.

Jason Thompson says he did the latter in late 2008 after he laid off three employees and stopped retaining 35 outside sales reps for his company, Rag & Bone Bindery Ltd., a Pawtucket, R.I., manufacturer of guest books and photo albums. He then hired an in-house sales manager to handle as many accounts as possible, which resulted in fewer but larger orders on average. He says the reason is that customers now get more personal attention, whereas previously the sales agents also represented other businesses.

Mr. Thompson says he also removed some high-cost, low-margin items from his company’s product line, which made it easier for his reduced staff to handle the workflow. Last year, Rag & Bone Bindery saw its annual revenue increase by 27% from 2008, he says.

Some business owners say the recession made them see that perhaps they had more talent on board than they actually needed. Carrie Davenport says she reached this conclusion after losing 14 employees last year from her recruiting firm, Century Personnel Inc. in Carmel, Ind. “I will never expand up to 36 again,” she says. “It was too many people.”

Ms. Davenport says she permanently eliminated several positions that didn’t generate profits, such as research jobs, and also let go of her lowest performers in other areas. She says she only regrets not having made these moves sooner. “I won’t hang onto a marginal salesperson when the economy is bad and I shouldn’t do that even when the economy is good,” she says.

Small-business experts caution, however, that owners who focus too heavily on savings and make cuts that are too deep could hurt their future prospects. “The danger is you cut back so much you miss an opportunity when it arrives,” says Harvard’s Ms. Koehn.

Business owners can take several steps to avoid reducing their headcounts too much, says Ms. Koehn. She suggests they analyze their company’s performance on a daily basis, perhaps by talking to sales staff about what they’re seeing and reviewing Web-site traffic.

She also recommends tapping an external board of advisers—as opposed to nervous employees—for help determining the smartest ways to reduce expenses.

And if entrepreneurs find themselves shorthanded, but not ready to add to their payrolls, a simple solution may be to hire free-lance talent or partner with a complimentary business, says Babson’s Mr. Shulman.

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